Exercise 12-3 Make or Buy Decision [LO12-3] Troy Engines, Ltd., manufactures a v

Question

Exercise 12-3 Make or Buy Decision [LO12-3] Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including al of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally 19,000 Units Per Unit Year Direct naterials Direct labor Variable manufacturing overhead Fixed manufacturing overhead traceable Fixed manufacturing overhead allocated Total cost $16 $304,000 10 190,000 38,000 9 171,000 2 12 228,000 $49 $931,000 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: L Assuming the company has no aliternmative use for the facilities that are now being used to produce the carburetors what would be the financial advantage (disadvantage) of buying 19,000 carburetors from the outslide suppler? 2. Should the outside supplier's offer be accepted? 3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $190,000 per year. Gven this new assumption, what would be finandial advantage (disadvantage) of buying 19,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? Complete this question by entering your answers in the tabs below Required Required Required Required Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 19,000 carburetors from the outside supplier? Required 2>

Explanation / Answer

1) Differential analysis ;

2) Financial disadvantage of buying outside suppliers -$57000

Offer should be reject

3) Differential analysis ;

4) Financial advantage of buying outside suppliers 133000

Offer should be accepted

Make Buy Direct material 304000 Direct labour 190000 Variable manufacturing overhead 38000 Fixed manufacturing overhead 57000 Purchase cost 646000 Total 589000 646000

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